Cautious Frost sits on pile of cash

Dick Evans, chairman and CEO of locally based Cullen/Frost Bankers, alternated between cranky and gloomy whenever he brought up federal spending, the deficit or banking regulations during the company's conference call with analysts Wednesday to discuss first-quarter results.

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“People continue to be scared to death,” he said about half-way through the session — just before allowing that companies are starting to spend again.

Indeed, Cullen/Frost, the holding company for Frost Bank, saw its average total loans climb to $9.1 billion in the quarter ended March 31, up 13.2 percent from the same period last year.

Yet Evans' tone brightened only when he paid homage to Texas' capacity for creating jobs and the thrift of companies based in the Lone Star State, and when he bragged about the J.D. Power and Associates award for customer satisfaction that Frost recently won.

As always, the 66-year-old lumbered through his comments in monotone, his sharp twang practically forcing listeners to imagine him sitting up straight behind a desk in a country bank, the epitome of the wizened, conservative lender.

Frost is that lender. It's also a regional powerhouse, a moneymaker with total assets of $22.5 billion.

For the clearest take on just how conservative the company is, check out its balance sheet — specifically, the line for cash and cash equivalents.

Frost reported last week that it's got $3.2 billion in cash on its books. Maybe this should go without saying, but that's a lot of money to have lying around.

For the sake of comparison, Valero Energy Corp. — San Antonio's largest public company by revenue and market capitalization — had $1.7 billion socked away as of Dec. 31. The refiner will report earnings, and update that number, next week.

Both companies are investor-owned, and there's a movement on to wring excess cash out of companies for the benefit of shareholders.

One of its leaders is hedge fund manager David Einhorn, who has battled Apple Inc. for its mountain of cash. Last week, the computer maker capitulated, announcing plans to return $100 billion through increased dividends to stockholders and share buybacks by the end of 2015.

But the officers ensconced in the Frost fortress on Houston Street don't seem overly concerned about an investor uprising, probably for good reason.

Maybe this also should go without saying, but Frost is neither a Valero nor an Apple. It's a highly regulated financial institution that's required to have enough capital on hand to survive economic shocks. It has to stay above several key thresholds, including Tier 1 risk capital, a measure of financial strength.

But the capital adequacy rules are expected to become tougher under Basel III, an international accord that — in response to the near collapse of the financial system in 2008 — is pushing banks to keep bigger capital cushions. In the United States, bankers are waiting on the Federal Reserve to hand down the final rules.

Phillip Green, Frost's chief financial officer, says he hopes to have the new requirements in hand later this year. But the inflection of his voice indicates he'll be shocked if that happens.

Meanwhile, deposits are piling up faster than Frost can loan them out, which is a major reason the company's cash increased to $3.2 billion from $2.1 billion a year ago.

And two things the bank could spend its cash on aren't particularly attractive right now, Green says. The interest rates on bonds generally are too low, and there are precious few tempting acquisition targets.

That said, he acknowledges Frost would meet the stricter standards coming down the pike. But he won't know by how much the bank clears the bar until the bar is in place.

The company has made a couple of friendly gestures to its shareholders recently.

Last week, it bumped up its quarterly dividend to investors by 2 cents, bringing it to 50 cents per share of common stock. And in February, Frost sold $150 million worth of preferred stock and is using $144 million of the proceeds to buy back shares of its own common stock, a move that can boost the value of remaining shares.

Normally, companies use cash to repurchase shares, and Green says it would have been cheaper to do that instead of essentially swapping preferred stock for common stock.

But Frost wants to see the new rules before making any decisions about what to do with its excess cash.

I wonder if any shareholders are chafing at Frost's reticence.

If I owned stock in the company — I don't — I'd be just fine with its caution.

Greg Jefferson is business editor of the San Antonio Express-News. You can reach him at 210-250-3259 or gjefferson@express-news. net.